February 11, 2010

I Read the CEA Report so You Don't Have to (But You Should Look at it Anyway)

One of the few benefits of being snowed in is the chance to read long documents more carefully than the normal pace of work allows. The 462-page economic report that the Council of Economic Advisers (CEA) released today is worth the time it takes.

On one level, it paints a clear and cogent picture of the path that economic recovery and growth over the next decade will have to take. The principal drivers of growth in the decade prior to 2007—construction and personal consumption—will both lag between now and 2020. Savings and investment will rise, as will net exports. This is more than national accounting arithmetic: Savings had fallen to unsustainably low levels in response to misleading economic cues (more on this a bit later), and investment sagged below trendline for much of the past decade. For their part, exports tend to decline more rapidly than GDP during recessions and to grow more rapidly during recoveries. So the story makes sense, at least qualitatively.

The CEA report offers an illuminating account of the savings rate. It turns out that three factors—the wealth/income ratio, credit availability, and the unemployment rate—explain most of the variation. Much of the decline in the savings rate since the early 1980s is attributable to the proliferation of credit; the near-collapse of saving during 2005 and 2006 is correlated with what turned out to be illusory increases in household wealth. Looking forward, it seems likely that the wealth/income ratio will stabilize below its peak, that credit will remain tight for quite some time, and that unemployment will decline only slowly.

Indeed, the labor market outlook over the next decade is not especially bright. The CEA is projecting above-trendline growth in GDP over the next eight years. Nonetheless, the unemployment rate will decline only slowly. It is projected to average 10.0 percent this year, 9.2 percent in 2011, 8.2 percent in the year President Obama will run for reelection, and 6.5 percent during the midterm election year of 2014. This is not the formula for a contented electorate.

The underlying math shows why it will take the job market so long to climb out of its hole. Recent estimates revealed that the economy has lost a staggering 8.4 million jobs since the Great Recession started in December 2007. In addition, the economy needs to generate about 100,000 jobs per month just to stay even with the natural growth of the labor force. In short, we are nearly 11 million jobs short of where we need to be. But the CEA estimates job growth for 2010 at 95,000 per month—just about enough to keep the hole from getting even deeper, but not enough to begin digging out. My calculations based on the CEA projections show that we will not recover the missing 8.4 million jobs until the spring of 2013, more than five years after the recession began. And we won’t reach full employment (defined as 5 percent unemployment) until nearly the end of the decade.

Suppose you have only five minutes to spend on this report. What are the five most illuminating pages? Here are my nominees, back to front:

Figure 8-7, p. 225, which dramatically illustrates how we have lost our leadership in post-secondary education attainment. We still have the greatest research universities in the world, but our workforce is treading water while the rest of the developed world is moving ahead. We won’t be the world’s economic leader in 30 years if we don’t do something to end our stagnation.

Figure 8-4, p. 219, which charts the unbelievable rise, over the past four decades, in the share of pretax income going to the wealthiest 10 percent of all families. Bottom line: Welcome to the 1920s.

Figure 7-4, p. 192: From 2000 until 2008, the percentage of non-elderly adults with private insurance coverage fell from 75.5 percent to 69.5 percent. What are the chances that this trend will halt if the Democrats let health reform die.

Figure 7-2, p. 184: During the past decade, health insurance has consumed all the growth in total compensation ... and then some. If we do nothing over the next 30 years, health care will constitute fully half of total compensation, and workers’ income net of health care costs—i.e., the amount remaining for everything else—will barely budge.

Figure 5-3, p. 141: The previous administration’s refusal to pay for two tax cuts, two wars, and prescription drug coverage has increased the budget deficit by more than 4 percent of GDP. How long will it take the Republicans to acknowledge that they bear some responsibility for the fiscal mess we’re in?

The late lamented Daniel Patrick Moynihan once remarked to the effect that, while every man is entitled to his own opinions, he’s not entitled to his own facts. How quaint that sounds today. But we can’t have a serious discussion of our problems—especially across party lines—if we don’t jointly acknowledge a common base of evidence. I’m not holding my breath.